Wednesday, 23 May 2012

Why this issue?

Why this issue? This is a question I find myself asking about the latest attack on the government's partial privatisation plans by the Greens (and BERL).

When you look at the literature on privatisation you don't see mention of a country's debt position as a major issue. So why have the Green's chosen this issue as the one they want to fight the government's partial privatisation plans on? It seems like a 'second order' sort of an issue, privatisation is going to have little effect on government debt compared to other monetary and fiscal policies the government can put in place. This plan of attack seems especially odd given that there are Good reasons for not liking the partial asset sales programme.

Going back to the early literature on privatisation, summarised in books such as Bos (1991) and Vickers and Yarrow (1988), there is little mention of debt as one of the major driving forces behind privatisation programmes. Bos spends 10 pagers, out of roughly 300, discussing privatisation and the government budget, Vickers and Yarrow say with regard to reducing the public sector borrowing requirement (PSBR) in the U.K.,

A more important difference arose from the Government's objective of reducing the PSBR, because the borrowings of a formerly nationalized firm are no longer part of the PSBR once the firm has entered the private sector. Moreover, as a result ofa curious accounting definition, the proceeds from the sale of state assets directly reduce the PSBR because they are treated as "negative public expenditure"! Unlike sales of gilts (i.e. U.K. Government bonds), sales of shares in privatized companies (i.e. Government equities) are deemed technically not to be borrowings, although in reality there is little difference between the two methods of Government finance. Privatization therefore accorded well with the objective of reducing the PSBR so as to meet the targets that the Government had set itself as part of its medium-term financial strategy for anti-inflationary monetary control.

If you look at results such as the 'neutrality theorems' of privatisation you find that the discussion is about efficiency. These results give conditions under which the private or public ownership of productive assets is irrelevant for the final allocation of resources. The more recent incomplete contracts approach shows that ownership can matter for efficiency of a firm. For example the model of Schmidt (1966) shows that there is a trade-off between allocate efficiency and productive efficiency with regard to privatisation. But in both the early and recent theoretical literature's the argument is about efficiency.

As to the empirical evidence on the subject the emphasis is also on efficiency. The following comes from the summary of chapter 4, ‘Empirical Evidence on Privatization’s Effectiveness in Nontransition Economies’, from William L. Megginson’s book The Financial Economics of Privatization,

The 87 studies from nontransition economies discussed in this chapter offer at least limited support for the proposition that privatization is associated with improvements in the operating and financial performance of divested firms. Most of these studies offer strong support for this proposition, and only a handful document outright performance declines after privatization. Almost all studies that examine post-privatization changes in output, efficiency, profitability, capital investment spending, and leverage document significant increases in the first four measures and significant declines in leverage.

So is the Green's plan of attack what it is to avoid having to deal with the established literature on privatisation, given that it offers significant support for privatisation? Or do they really think this is the big issue to do with privatisation? And if so, Why?